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Fed increases target rate to 3.75-4.00%

federalreserve.gov

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Re: Fed increases target rate to 3.75-4.00%

#131

Post by apropos_g »

mywittyname wrote: post #107
georgeecollins wrote: post #29

Earlier quoted context omitted.

Here's my try: - Unlike popular perception, money is not created by "printing it". Money is created, or the supply of money is added to, when entities (corporations, institutions, people) borrow money from a bank. - When interest rates go up, the cost of borrowing goes up because you have to pay back more over time. - When the cost of borrowing goes up people borrow less. - When their is less borrowing their is less…

Lots of companies make money from the cash flow spread between interest rates and whatever their investment is. And when interest rates rise, entire segments of their business become fundamentally unprofitable. It's not just banks either. Say a company buys a $100k asset, and they can use it to generate $10k in revenue. That's a profitable investment at 5% interest ($5k), but not at 10% ($10k). So at high enough inte…

> and can have a cooling effect on asset prices at broad levels.

Well asset prices aren't the prices of food and gas.

Re: Fed increases target rate to 3.75-4.00%

#132

Post by apropos_g »

lamontcg wrote: post #130
apropos_g wrote: post #4

"I am once again asking for" a common sense explanation for how increasing interest rates will reduce the prices of retail food and gas. (This should be the new Deleuze meme.)

They're increasing the cost of borrowing, which directly affects the cost of loan financing for something like a car or a house. But probably more importantly the increased cost of borrowing hits businesses which are living on the edge and have been rolling over short term loans at low interest rates. When that debt service triples then those unprofitable businesses will start facing negative cash flow losses and can…

> The reduced demands for goods then filters through the system producing more layoffs and more reduced demands for goods across every sector and the economy contracts into a recession.

Yes, but prices are not demand, they are supply and demand. What if you shut down the parts of the economy that make food and gas?

For example, how do fed interest rates shut down the parts of Saudi's economy that makes oil?

Anyway, in your explanation, you do not use the words "food" or "gas" which is how the "CPI" is calculated.

> Honestly don't know why this is such a mystery to everyone or why the question needs to be a "meme", it is pretty straightforwards.

Using the words in the question to answer the question is "straightforwards."

Re: Fed increases target rate to 3.75-4.00%

#133

Post by HPsquared »

SideQuark wrote: post #97
connorgutman wrote: post #67

Earlier quoted context omitted.

Ah yes, the almighty Fed which knew exactly what to do in 2020, 2008, 2001, 1990, 1987...

Yes, the Fed that stopped the much longer, more frequent, and deeper panics and recessions that occurred before it. In fact, it did so well for so long compared to previous methods, that the Great Moderation is a term in economics for the stability it gave. Instead of snarkily listing places you think it failed, compare that to pre-Fed failures, and you'll see that the Fed is a lot better than other solutions. And th…

The Great Depression wasn't so good.. that came after the Fed.

Re: Fed increases target rate to 3.75-4.00%

#134

Post by apropos_g »

dingaling wrote: post #126
apropos_g wrote: post #118

Earlier quoted context omitted.

> By sucking the money out of the system. Does it suck money out of the system? Here's a common sense example: Raising interest rates caused assets like stocks and bonds to decline in price. People sell these equities and now have cash they are willing to spend on more shit, specifically what is in the CPI. So the opposite can also happen.

No it doesn't suck money out, but it reduces the rate at which new money is created through borrowing. Every time a loan is agreed, the value of the ${NATIONAL_CURRENCY} is diluted by a tiny amount. And that tiny dilution is amplified through the economy and has a proportionally larger effect on the price of end-user items which inflate to compensate. Increasing interest rates is not a lever that directly affects thi…

> No it doesn't suck money out, but it reduces the rate at which new money is created through borrowing.

This is true. It does not tell me how the money created through borrowing between 0.75% rates and 4.00% rates was used to buy food and gas though.

That borrowed money was overwhelming actually used to buy equities, which the fed is obviously impacting very effectively, and not food and gas, even indirectly.

Re: Fed increases target rate to 3.75-4.00%

#135

Post by lazide »

c0nsumer wrote: post #79
lazide wrote: post #54

Earlier quoted context omitted.

It takes years for existing sellers to wake up to market shifts, unless they’re desperate is why. If it’s a nicer area, many can ride it out through an entire bust cycle. Most folks can get 30 yr fixed rates, so any area where most owners have stable employment and/or strong capital reserves, can cruise with zero movement for years if conditions aren’t favorable, barring estate sales, forced sales from divorces, etc.

Your second sentence is the position we're in. We were very fortunate to buy a house in a nice area a year ago. Right at the peak, but it was a fixer-upper from a friend, so we got a good deal and skipped a lot of fees/commissions. Even with what we've put in to fix it up, we should still be above water post-dip. And that sweet, sweet 2.375% mortgage...

It's a good place to be in! Pretty much only secondary to the folks who did it a couple cycles ago and paid everything off, and managed to not explode things/screw it up.

Enjoy, and hopefully no one comes around to give you grief about it.

Re: Fed increases target rate to 3.75-4.00%

#136

Post by apropos_g »

foobarian wrote: post #125
apropos_g wrote: post #112

Earlier quoted context omitted.

Well, I don't see a common sense explanation as to why the rate of increase should decrease either. We could also say, "Eventually, the rate of increase will go down anyway, in the absence of any action from the fed."

I don't understand the entire system either, but one obvious effect is that there will be much less cash-out refinancing or flipping, which means at least that source of cash and the associated demand will get smaller. And judging how many people I know around town who have been treating their houses like ATMs, it's not a small effect.

> And judging how many people I know around town who have been treating their houses like ATMs, it's not a small effect.

This is true, this is at least appealing to common sense. But I don't see how that excess cash was going into spending more on food and gas.

If I run a supermarket and raise prices, and people like lettuce, if they keep buying the lettuce, because $3.75 lettuce is still worth it compared to $2.00 lettuce, well, CPI can increase a lot, and demand appears to be inelastic, and interest rate increases did nothing to reverse CPI.

Re: Fed increases target rate to 3.75-4.00%

#137

Post by lamontcg »

r00fus wrote: post #33

This will do nothing for actually impacting inflation. Instead it will crash the economy. Real inflation seems to be due to price gouging by companies[0], combined with energy increases due to OPEC price fixing [1], and rent increases due to collusion [2] and corporate domination housing market [3]. Jerome Powell had no answers to the Senate Oversight committee when asked how increasing rates would actually reduce th…

> This will do nothing for actually impacting inflation. Instead it will crash the economy.

This is literally nonsensical.

Businesses will lose pricing power in a recession and will slash prices. Nobody will be buying new cars and their prices will drop, the used market will similarly drop until it finds a new floor. People who are out of work and can't afford their car payments will flood the used car market, etc. Multiply this by all the other goods markets. Same things for rents as people get fired and move back in with their parents or move out of the expensive cities.

I think I've responded to you before and I think you've got a nonsensical opinion that price gouging and inflation are in opposition to each other, when they just aren't. If prices rise, that is inflation. If prices rise due to price gouging because demand is inelastic, then that is also inflation. If the fed crashes the economy that will be deflationary and cause a recession, that will reduce prices. Companies can only collude to pump prices when they have inelastic demand, once the economy contracts sharply they have to defect and slash prices again.

By crashing the economy Powell intends to break the back of the nascent labor movement and by dropping asset prices will allow the rich to buy up more of the country.

Re: Fed increases target rate to 3.75-4.00%

#138

Post by MrRiddle »

apropos_g wrote: post #128
yongjik wrote: post #122

Earlier quoted context omitted.

Oh, but people will stop buying so much food and gas, just not directly. Without enough money, some people will cancel their planned trip to Hawaii. That's a lot of gas not burning right there. Or they won't buy another TV, which needs gas to be delivered to your home. With less people competing for precious gas, its prices drop.

> Without enough money, some people will cancel their planned trip to Hawaii. By this logic, why doesn't Congress illegalize travel? Is that going to reduce the cost of travel? Will that reduce CPI, which measures prices, not demand? > Or they won't buy another TV, What if we illegalized buying TVs? Would that make TV prices fall? You think that is going to reduce CPI? I'm not saying your explanation here is stupid.…

No post body was provided.

Re: Fed increases target rate to 3.75-4.00%

#139

Post by dragontamer »

bern4444 wrote: post #92
dragontamer wrote: post #2

Not much to say here since this was foretold / expected. All eyes on the 2:30pm press conference, where people will hope to divine the future from Powell's statements. I'm going to bet ~40 minutes of "Inflation isn't at 2% yet and we're committed to reducing inflation to that level". I think what people really want to know is, where do these rate-increases end? In Sept. 22nd meeting, Powell thought 4.5% was roughly w…

The answer from the meeting was effectively, "we don't know". People continue to underestimate the final rate and duration we'll end up at. The market shot up initially on a 3 line statement in the released notes that was interpreted as beginning of the end of rate hikes. Then the press conference started and the market shot right back down as Powell said we don't know how high and how long rates will go for. I'm ban…

> The market shot up initially on a 3 line statement in the released notes that was interpreted as beginning of the end of rate hikes.

I'm not sure about that.

My coworkers are arguing that a bunch of people are buying put options, effectively shorting the stock market, in the days prior to these FOMC meetings. At 2pm, the meeting notes come out, and we see that the expected .75% rate happened.

Since that was "expected", all the put options are now sold. That causes the stock market to jump up (since the effective-short positions are liquidated).

Its just a hedge, just in case the numbers come in and the Fed chooses like 1% hike or higher instead of the expected .75%.

Re: Fed increases target rate to 3.75-4.00%

#140

Post by Analemma_ »

BitwiseFool wrote: post #37
c0nsumer wrote: post #27

Earlier quoted context omitted.

This affects mortgage rates, but not housing prices. If anything, housing prices should decrease a bit as rates go up, since people tend to buy based on monthly payment which is house price + rate. Therefore, your down payment should be just as effective as it was before, particularly if it's enough to pay for much of the house and keep your monthly payment lower.

This should be happening, but prices do not seem to be falling in-line with what we would expect. I have no answer as to why this is.

Housing prices are very sticky in the downward direction. Sellers really hate taking a hit on their asking price, and they will just stay in the house rather than sell for a long time. It will take years of elevated interest rates before prices start to come down significantly.
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